Bel Fuse Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; dollar amounts below are in millions unless stated otherwise. Bel designs and manufactures products that power, protect and connect electronic circuits.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $127.4 | $140.7 | $252.8 | $259.0 |
| Gross profit / margin | $19.9 / 15.6% | $29.0 / 20.6% | $43.4 / 17.2% | $50.1 / 19.4% |
| Income from operations | $5.0 | $10.7 | $7.8 | $11.1 |
| Net earnings | $3.0 | $6.6 | $4.1 | $5.3 |
| EPS, Class A / Class B | $0.23 / $0.24 | $0.52 / $0.56 | $0.31 / $0.34 | $0.41 / $0.45 |
Q2 sales fell 9.4% year over year and first-half sales fell 2.4%. Q2 operating income includes a $4.3 million pre-tax gain on sale of the Inwood, New York property; excluding that gain, operating income was approximately $0.7 million. First-half operating income excluding the gain was approximately $3.5 million. The filing attributes weaker earnings principally to lower volume and pressure from elevated material costs.
For the first half, operating cash flow was $7.8 million, versus $1.2 million in 2018. Capital expenditures were $5.3 million; property-sale proceeds were $5.8 million. Cash increased $4.5 million to $58.4 million. The company paid $1.6 million in dividends and repaid $1.5 million of long-term debt.
Balance sheet and liquidity
At June 30, 2019, cash was $58.4 million, current assets $281.4 million and current liabilities $87.2 million; the current ratio was 3.2, up from 2.7 at year-end 2018. Term-loan borrowings were $114.5 million, with a $113.0 million carrying value of total debt after deferred financing costs. No revolver borrowings were outstanding; the $75 million facility had $37.1 million of covenant-permitted borrowing capacity. The term loan matures December 2022. Bel reported compliance with its debt covenants.
Operating lease liabilities recognized under the newly adopted lease standard totaled $18.4 million at quarter-end. Total assets were $449.7 million and stockholders’ equity was $180.3 million.
Material changes and management commentary
- Q2 sales declined across all three product groups. First-half connectivity sales were down 5.4% and magnetic sales down 5.6%; power solutions and protection sales rose 4.2%.
- North America and Asia external sales declined in the first half, while Europe increased modestly. In Q2, all three regions reported lower external sales.
- Material costs rose to 45.7% of sales in Q2, from 41.9% a year earlier, and to 43.8% for the first half, from 41.4%. Management said higher-cost components purchased during 2018 were still flowing through cost of sales. Labor costs as a share of sales decreased, helped by foreign-exchange movements.
- Backlog was $150.9 million at June 30, down 12% from year-end. Connectivity backlog rose 8%; power solutions and protection fell 17%, and magnetic backlog fell 29%.
- Bel completed its Inwood facility sale and substantially completed the manufacturing and warehousing transition. First-half restructuring charges were $1.4 million. Management expects the Inwood transition and Power R&D realignment to generate $2.1 million in annualized savings beginning Q3 2019, with additional Asia measures expected to generate $1.4 million annually beginning Q4.
Outlook, risks and contingencies
- Management expects the balance of 2019 to remain challenging for sales and margins, citing customer and distributor inventory reductions, slower bookings, lower sales volume and continuing elevated material costs. The filing provides no specific revenue or earnings guidance.
- Management believes current liquidity and expected operating cash flows can fund operations over the next 12 months. It intended to repatriate a further $5.0 million of foreign cash by year-end to reduce debt; this is a forward-looking expectation, not a completed transaction.
- Foreign exchange affected costs: management estimated favorable currency movements reduced first-half operating costs by $3.2 million. Bel also faces foreign-currency and variable-rate debt exposure.
- Uncertain tax-position liabilities were approximately $28.5 million. An Italian tax matter related to an acquired business includes an estimated $12.0 million liability, offset by an indemnification asset under the acquisition agreement; the Supreme Court appeal remained unresolved.
- Management said other legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Investor facts to verify
- Whether customer inventory normalization and weaker bookings persist, and how backlog converts to sales.
- Whether elevated input costs and product mix continue to constrain gross margin.
- Whether projected restructuring and ERP savings are achieved on schedule; ERP implementation costs were estimated at $6.9 million in total, with $6.5 million incurred cumulatively by June 30.
- Debt-covenant headroom, actual debt reduction, and the execution and tax cost of planned cash repatriation.
- Resolution and potential cash implications of uncertain tax positions, including the indemnified Italian tax claim.